Valuing tangible and intangible assets consumes large amounts of human resources, and the valuation estimates that result are relied on for a broad range of economic and other decisions and activities. The assets being valued include, among other things, individual items (and groups of items) of tangible personal and real property, entire enterprises such as corporations, governmental bodies, institutions, financial instruments such as stocks and bonds in public and private companies, and intangible assets such as intellectual property and good will. Much of the description here is cast in terms of several specific types of financial instruments, such as stocks, bonds, currencies, commodities, and financial derivatives, like options and futures contract written on stocks, bonds, currencies and commodities. Yet, the concepts put forward here apply broadly to assets of all kinds and to approaches to valuing them.
Some approaches to valuation of an asset are directed to determining what may be called the present intrinsic value of the asset. One classic definition of present intrinsic value is the sum of present values of all future cash flows that are expected (discounted based on some definable risk) to flow from the asset. Such a present intrinsic value represents the price at which a potential owner of the asset would be indifferent between owning the asset or owning a stream of cash flows that have the same risk as the expected cash flows of the asset. As a corollary, when the price of such an asset is below the intrinsic value, potential owners are expected to prefer buying the asset at that price, thus increasing its demand and in turn the price, and to continue to do so until the present price is equal to the present intrinsic value. Conversely, when the present price exceeds the present intrinsic value, owners of the asset will prefer to sell the asset and to continue to do so until the present price (we sometimes refer to the present price as simply the price) drops to the present intrinsic value (we sometimes refer to the present intrinsic value as simply the intrinsic value).
The intrinsic value of an asset and the factors that influence it are important to a wide range of people (including families, and groups of them) and enterprises (we use the term enterprises broadly to include corporations, governments, institutions, and any other kind of legal entity). We sometimes use the term interested parties or parties in the broadest sense to include any people or enterprises that have an interest in the value of assets.
Interested parties can include parties who have time, money, or other assets to invest (we sometimes call them simply investors) and other people who are not investors but are interested in the values of assets for other reasons.
Investors must make decisions about investments of their assets, even if the decisions are to do nothing (for example, by stashing cash) and allow the assets to garner no yield. More typically, though, the goal of interested parties is to maximize value from their assets.
As part of reaching this goal, virtually all interested parties care about the intrinsic value of an asset and the factors on which it depends. As investors develop an estimate of the intrinsic value of an asset, they tend to buy the asset when its price is at or below the estimated intrinsic value, and sell the asset at or above its estimated intrinsic value. Investors may believe that the market traded price of an asset will move towards the intrinsic value. Individuals may commonly expect the market price of an asset at a point of time in future, to be equal to the estimated intrinsic value of the asset at that future time.
Interested parties may also include people who are not themselves direct investors. For example, present and potential managers of a company, its consultants, bankers, and lawyers all strive to understand the intrinsic value of the enterprise and the factors that affect the intrinsic value, for a wide variety of purposes. Among other things, understanding the value and the factors helps them to identify and focus their efforts on actions that can sustain or increase the value (we sometimes refer to intrinsic value simply as value), with the expectation of receiving a part of value because of their involvement.
Interested parties may also include present and potential employees of enterprises, who may want to spend their time and effort in companies and markets offering good opportunities for them to sustain and increase value and capture a portion of it for themselves. An employee of a company that has a shrinking value, or of a department of a company that does little to add value to the enterprise, can hardly expect to thrive personally.
Entrepreneurs are interested parties who use their understanding of intrinsic values of assets within a market, and the drivers of value, to make decisions on where and how to spend their time and effort, planning actions that will enhance the value, allowing them to capture a part of it.
Estimates of values of assets are available from a wide variety of sources in various contexts, including newspapers, magazines, analysts' reports, and other conventional publications, and web sites and proprietary on-line information terminals. Some sources provide detailed expert analysis of an asset's value. Others aggregate information from other sources at a single portal.
Generally, an analyst's report on the stock of a company, for example, is a static publication that an investor may read to gain some understanding of the analyst's reasoning. Other investors may simply refer to the analyst's conclusion about how much a stock is worth without reviewing the basis of his opinion. Some of the raw data that the analyst used in forming his opinion may be repeated in the report, but the report generally does not provide access to raw data and models used by the analyst in its creation. Publications that aggregate information from other sources may provide access back to those sources, but generally do not perform analysis of their own, other than the initial selection of what information to collect and distribute.
Financial analysts use a variety of models and other qualitative and quantitative approaches together with facts and assumptions to research, estimate, and report values of assets.
Values of certain financial instruments depend on the value of an underlying asset or the occurrence of an event. Examples of such contracts or rights are options, futures, and event contracts. In an American option, for example, an investor purchases a right but not an obligation, to buy (a call option) or sell (a put option) a specific asset at a specified price at some time on or prior to a future date. A futures contract is an agreement to buy or sell a fixed quantity of a specified commodity, currency, or security for delivery at a fixed date in the future at a fixed price. An event contract pays (or does not pay) based on the occurrence or non-occurrence of some future event. It may be binary, for example, paying based on whether or not a company's revenue growth beats inflation, or it may be variable, for example, paying based on the amount by which the company's revenue growth beat inflation.
In the field of asset valuation, some sources charge directly for the information they make available. In some cases (for example, financial websites that aggregate information from other sources), advertising revenue allows a source to provide the information free. Parties that provide users a platform to trade stocks, bonds, and contracts can generate revenue by charging a commission on a per trade basis or on the volume of the transaction.
Independent research and Wall Street firms like Lehman Brothers and Goldman Sachs have analysts who estimate values of assets, for example, the stock of a company. They communicate their estimates and analysis in periodic write-ups shared through electronic files, for example, PDF files, or on paper. They also create additional material to share, for example, spreadsheets. The shared spreadsheets include some of the assumptions, facts, and calculations used in the computation of the value of the asset or other results. The spreadsheets and write-ups can be distributed internally to relevant people at the research firm for comment and use and in some cases for duplication and alteration by others to serve their own purposes. The spreadsheets and write-ups can also be provided to people outside of the firm (e.g., their customers) for the same reasons. Any distribution outside of the firm is, at the first level, controlled by the firm for its own purposes. For that reason, a spreadsheet or write-up that is distributed outside of the firm typically includes only a subset of information useful in understanding the derivation of the value estimate, and other results.
The distribution serves to stimulate inquiries from possible customers. Customers external to the firm may rely on their own ability to synthesize information from various sources to derive insights that are unique and that may allow them to monetize on their unique views. The people to whom the spreadsheet is distributed (either internally or externally) can engage in discussion (commonly with the people within the research firm who are responsible for generating such estimates, the creators) by email, or over the phone, about the models, and those discussions may lead to changes in the model being made by the creator.
Anyone with an account at the research firm (and that could be anyone in the public) may have access to some of these shared models and write-ups on the firm's website.
Discussion websites on topics that relate to values of assets such as stock allow any person who has access to the internet to log on and review comments of others and offer comments himself. These sites thus enable a community of the public to democratically discuss issues around the values of assets. In some cases, the sites are moderated by a central authority. In addition, aggregator websites may have expert opinions on products, markets, companies or stocks. These opinions are a general discussion of some of the issues of interest, or common appeal and are typically directional, qualitative indicators or views.